Market Backdrop

As we discussed and analysed in last quarter’s note, we have long been cautious of the fervor surrounding the so-called “hyperscalers”. So it was encouraging for us in January when it seemed the market narrative was catching up, with commentators focusing on the huge capital expenditure required to build data warehouses, the impact of this on profits, and questions around where the revenue was going to come from to pay for it all.

But the eye of the storm, in the event, was a crash in the share price of any software company perceived to be at risk of disintermediation by AI agents, and some associated perceived collateral damage such as listed Private Equity stocks (we think many Private Equity assets are mispriced anyway: an uncontroversial statement).

The ‘big one’ to our minds, will come when this dynamic spreads to the much larger ‘mag-7 + friends’ compartment of the market, as spending plans and profit outlooks are properly reassessed. There is also a chance it spreads much deeper into the financial system than just listed Private Equity, specifically through the banks whose balance sheets have facilitated much of the madness and likely also into insurance companies, to whom the private credit loans and private equity exposures will no doubt have been palmed off in the name of ‘capital efficiency’ and ‘regulatory arbitrage’.

We have no exposure to hard tech in the Goodhart European Fund, limited exposure to financials and are very cautious of any industrial or consumer growth plan hitched to the AI capex bandwagon.  So it was validating to see the first two months deliver good performance even as the market only just started to question in part the consensus narrative here. We think when the tide goes out properly, there will be lots more ways to lose lots of money than we have seen so far.

March saw a totally different market dynamic as Trump decided to start firing missiles at Iran. Defense stocks went down not up, and “defensive” consumer staples weren’t defensive.

At least oil stocks did the obvious thing, and here we had to be nimble to close an obvious lack of exposure in the fund, as soon as events began to unfold: we did this through buying Equinor which pipes gas directly to Europe and was on 4x spot earnings with risks the gas price would spike yet further in the short term.

Unsurprisingly given its reliance on global energy markets, and with the Russian – Ukraine cost of living crisis fresh in the mind, European markets were hurt harder than most with some of our domestic small and mid-cap holdings inevitably exposed, particularly cyclical and consumer ones. Annoyingly, some of our defensive holdings, which we own in part to calibrate the overall cyclicality of the portfolio, didn’t show up.

We absolutely remain convinced of the long-term prospects of our stocks, some of which are on now even more attractive starting valuations. These long-term prospects we judge to remain undimmed outside tail-risk scenarios relating to Iran, notwithstanding the current volatility and business challenges the war can invoke.

Fund discussion

The fund has an objective to uncover stocks in Europe which have the potential for attractive absolute returns on a five-year view, which it then aggregates into a portfolio aiming to compound absolute wealth over the medium-term.

We are convinced that at this stage of their ubiquity, index-relative concepts are unhelpful, and will fall out of favour if the more difficult market backdrop we expect over the coming years comes to fruition. Following this logic then, an absolute return mindset is likely to become more potent.

We wrote these words in our launch note and they remain totally relevant. But it’s probably worth addressing upfront: how do we explain the fact that the fund went up in January and February, and down in March with a higher beta than the market?

The most obvious response is that when assessing companies, we are looking at their absolute medium-term (3-5 year) prospects. The path dependency is not irrelevant, not least because market reflexivity can get in the way and change the outlook, but we are comfortable buying a company with cyclical risk (with reference to the overall portfolio exposures of course) if it can be sufficiently cheap and with sufficiently good prospects in 5 years’ time.

There is however a second more subtle consideration. Having an absolute mindset orientation when assessing stocks doesn’t necessarily mean choosing and blending stocks in a way to generate low downside capture.

We do this explicitly in other strategies at Goodhart where the mandate and flexibility are built for it, but in a broadly fully invested European fund there will inevitably be at least some market exposure in the short term. We have to be realistic and honest about what is achievable – and there is a very narrow set of possible European portfolios which could have delivered a positive absolute return since the bombs started raining on Tehran.

That said, of course we do think about the degree of defensiveness from an absolute perspective, and in line with the business cycle framework it is more and less important at different points in the cycle. However, for an event such as the Iran war, which has a very specific effect on the internal dynamics of the market (energy producer/consumer or domestic/international for example) as already mentioned, even getting the overall defensiveness ‘right’ can be scuppered by holdings performing differently than expected in the short-term.

One of the most important metrics for a portfolio to have the potential to perform differently to the market is it’s common money (i.e. the overlap with the index across a particular ‘lens’ such as country or sector). Even concentrated portfolio at the stock level with high active share can be ‘closet-trackers’ if they have high common money. 20 years of client discussions make us tend to think this is an underappreciated dynamic. We are informed by some research we have been doing on the team this quarter on this topic which we think is extremely interesting and please reach out if you would like to see it.

If we were to say that we have a market-agnostic, absolute return mindset, but then built a portfolio with a high common money to the market, it would be right to question whether we were walking the walk. However, as the chart below shows, this is not the case – our portfolio is one of the lowest common money funds in the sector, which we think lends credence to the notion we are buying and selling stocks based on our views rather than any market-relative considerations. If broad markets struggle in coming years, this low common-money characteristic will be virtually a statistical prerequisite to have a chance to deliver decent absolute returns.

Scatter of Europe ex-UK and Europe ex-UK SMID funds by country and sector common money (100% index overlap in top right):

We wrote extensively in our launch note about the overall positioning – with particular analysis about our low exposure to banks and tech hardware – and remain convinced that these are areas to avoid. We did however take the opportunity to invest in a couple of growth companies with long term prospects whose share prices suffered through the volatility of Q1 – where we think the market is throwing the baby out with the bath water. These are Bonesupport and Raysearch.

Raysearch’s share price was down 24% over the year before we purchased it but 50% since its peak in July 2025. Bonesupport’s share price was down 47% over 1 year. It is an orthobiologics company with an injectable bioceramic that is used to fill bone voids. If you break your leg you want the surgeon to use Cerament because antibiotics are contained in the injectable itself rather than administered separately, and nobody else does that in the way Bonesupport’s technology works. Raysearch is a software business providing a range of products that control, optimize and guide radiotherapy treatment. This is not a business that is likely to be disintermediated by an AI agent using Claude Code, but the share price has behaved as such.

Raysearch and Bonesupport are both fast-growing companies that a year ago were too expensive for us but now present long-term growth at prices we can stomach. Part of working in an experienced team with diverse perspectives is to be able to leverage others knowledge and skills at appropriate moments, and we believe this is one of those opportunities.

Business Cycle Exposures – balanced cyclicality (as at 12^th April 2026):

Top 10 Stocks and selected portfolio metrics (as at 12^th April 2026):

Conclusion

We are excited about the absolute medium-term prospects for our portfolio holdings and overall positioning. As we said last month, if the market continues to be led by further technology and banks outperformance, which are consensus areas of overweight, the fund would underperform.

Underperforming in the short term on this basis wouldn’t concern us because for the reasons described, we don’t think this is likely over the medium term.

Conversely, we have high conviction in the upside for our stocks without taking excessive cyclical risk, and think we can generate attractive medium-term compound returns, providing we are correct on the fundamentals. These absolute compounded returns are what we think really matter in the final reckoning. In a geopolitically, demographically and valuation challenged world we suspect that are we able to achieve that goal, it will represent a welcome outcome for shareholders in the fund.